Case Study · Central Valley, California
A third-generation farm family weighs a life-changing offer — and the tax math that determines how much of their legacy actually survives the sale.
The Scenario
The Alvarez family has farmed 1,000 acres of Kings County ground for three generations — a mixed operation of permanent crops and row crops that has supported the family since the 1960s. In early 2026, an institutional buyer approached them with a firm offer: $28 million.
The children are grown and pursuing careers outside agriculture. Water allocations have tightened. Operating costs keep climbing. Before concluding that a sale is the right path, the family works through every legitimate option — including continuing to hold the farm under a new structure. After that analysis, they conclude a sale makes sense for their specific situation. That leaves one question that has to be answered honestly:
After taxes — how much of that $28 million do we actually get to keep?
The Math, Step by Step
Every farmland sale breaks down into the same four questions. The answers determine whether a family preserves generational wealth — or watches a meaningful share of it leave the family for good.
Step One
How much cash actually reaches the family before the IRS and FTB get involved.
Step Two
California farmland sellers face four distinct tax layers. Each one compounds the next.
Federal Long-Term Capital Gains
20% on the gain above depreciation recapture
Federal Depreciation Recapture
25% on $1.2M of prior depreciation
Net Investment Income Tax (NIIT)
3.8% federal surtax on the full gain
California State Income Tax
Up to 13.3% — no preferential rate for capital gains
Based on 2026 federal and California rates assuming top marginal brackets. Actual liability varies with filing status, other income, basis adjustments, and timing. See disclosure below.
Step Three
The number every farm family needs to see before they sign escrow papers.
Net After-Tax Proceeds
$12,435,000
A lifetime of work. Three generations of ownership.
Approximately 45% of the sale price preserved for the family.
Step Four · The Alternative
The same sale, structured differently — using multiple tax-planning tools rather than a single product, so the family keeps more of what they built.
Section 1031 exchanges, installment sales, and charitable remainder trusts are all recognized tools under federal and California law. Used together, they defer federal LTCG, depreciation recapture, NIIT, and California state tax on most of the gain.
The family redeploys roughly $22.66M of net equity — not $12.4M. Every dollar that would have gone to tax continues compounding for the family instead.
A thoughtful blend across replacement farmland, triple-net commercial real estate, an installment structure, and a charitable remainder trust — not a single product category.
Heirs may receive a stepped-up basis on real property held at death, potentially eliminating deferred gain entirely — a powerful tool for intergenerational wealth transfer.
The Two Paths
Same property. Same sale price. Two radically different financial outcomes for the next generation.
Path A
Path B
The Difference
≈ $10,225,000
preserved for the next generation through deliberate planning.
Run Your Own Numbers
Enter your estimated figures below. The calculator applies current 2026 federal and California rate assumptions. This is an educational illustration, not a tax opinion.
Original cost + improvements − accumulated depreciation.
Total Realized Gain
$0
Estimated Total Tax
$0
Net After-Tax Proceeds
$0
Preserved via Planning
$0
Assumes top-bracket rates: 20% federal LTCG, 25% depreciation recapture, 3.8% NIIT, 13.3% California state. Transaction costs estimated at 3%. For educational illustration only — your actual tax liability depends on filing status, other income, holding period, basis substantiation, and many other factors. Consult a qualified CPA.
Why This Analysis Is Different
Most analysis a farm family sees about DSTs, 1031 exchanges, and replacement properties comes from broker-dealers and real estate sponsors who earn commissions of 5% to 7% on every dollar placed. Their incentive is the transaction — not the outcome.
Avidity Capital Inc. is different by design. We are a Registered Investment Adviser operating under a fiduciary standard. We are legally required to act in our clients’ best interests. We charge a flat advisory fee for our work and accept no commissions, no referral fees, and no revenue-sharing from real estate sponsors, DST issuers, qualified intermediaries, or any other party.
That structural independence is what allows us to recommend what actually fits the family — including, sometimes, continuing to hold the farm.
Legally obligated to act in your best interest — not ours.
We do not accept compensation from sponsors, brokers, or issuers.
Our compensation is transparent and disclosed up front in our engagement.
We work alongside your CPA, attorney, and broker as the central quarterback.
What the Family Decided
Before deciding anything, the Alvarez family ran the full hold-versus-sell analysis with Avidity Capital — including what it would look like to keep the farm under a professional lease with the next generation as passive owners. For their specific circumstances — tightening water allocations, no heir willing to operate, and a buyer offering a strong price — a structured sale was the right answer. For a different family in different conditions, holding might have been.
With the decision to sell made deliberately, the family worked with Avidity Capital alongside their CPA and estate attorney to structure the proceeds across five complementary strategies — each serving a different goal, and no single one dominating the outcome:
The family exited active farming but stayed invested in real estate — across multiple asset types, with income sources structured to fit their actual needs rather than any single product’s marketing story. The next generation will inherit a diversified base of real estate and trust assets with meaningful stepped-up basis opportunities. Approximately $10 million that would have otherwise left the family in tax continues working for them today.
A Letter Series for Families
Short, plainspoken letters we wrote for our own families. Eleven questions on taxes, timing, family, and the land itself — written in plain language. We send the series once. No follow-ups unless you ask.
Send Me the LettersFree. No commitment. Unsubscribe anytime.
Before You Sell
Every family’s situation is different. We offer a confidential, no-obligation conversation to walk through your numbers, your timeline, and the strategies available to you — months before any property reaches escrow is ideal.
Questions We Hear Often
Combined federal and California state taxes on a farmland sale can reach approximately 37% of the long-term capital gain, plus 25% federal recapture on accumulated depreciation. On a $28M sale with a $1.8M basis and $1.2M of depreciation, the combined tax can exceed $10 million without planning. Exact figures depend on your cost basis, depreciation history, debt structure, filing status, and other income.
A properly structured 1031 exchange can defer federal and California capital gains, the Net Investment Income Tax, and depreciation recapture on equity that is reinvested into like-kind replacement property. Any cash taken out or debt not replaced (known as “boot”) is taxable in the year of sale. Strict 45-day identification and 180-day closing windows apply from the date the original property is sold.
Real property held for investment or productive use in a trade or business qualifies — including other farmland, rental residential property, commercial real estate, triple-net leased buildings, and Delaware Statutory Trusts. A principal residence, inventory, or property held primarily for sale does not qualify. Since 2017, personal property no longer qualifies under Section 1031.
Ideally 12 to 24 months before closing. Once a property is in escrow, many tax-planning options narrow significantly. Early planning allows for proper basis substantiation, depreciation review, estate coordination, identification of replacement property options, and alignment of the family’s long-term goals before the 45-day clock ever starts.
No. Avidity Capital Inc. is a fiduciary Registered Investment Adviser. We do not accept commissions, referral fees, or revenue-sharing from real estate sponsors, DST issuers, qualified intermediaries, or any third party. We charge clients a flat advisory fee for our work and remain completely objective in the strategies and partners we recommend.
No. This case study is a hypothetical illustration for educational purposes only. Actual tax outcomes depend on individual facts, filing status, basis, depreciation, debt structure, other income, and timing. Before making any decisions, consult a qualified CPA and attorney. Avidity Capital Inc. does not provide legal or tax advice.
Hypothetical Illustration. The Alvarez Family scenario is a composite example constructed for educational purposes. It does not represent any specific client, transaction, or guaranteed outcome.
Tax Estimates Are Simplified. Calculations apply top federal and California marginal rates for 2026 and do not account for all factors that may affect an actual taxpayer’s liability, including filing status, alternative minimum tax, other income, itemized deductions, and state-specific adjustments. Individual outcomes will vary based on facts and timing.
Not Legal or Tax Advice. This material is educational. Readers should consult a qualified certified public accountant and attorney before making any decisions regarding the sale of real estate, 1031 exchanges, Delaware Statutory Trusts, charitable remainder trusts, installment sales, or estate planning.
Investment Risk. All investments involve risk, including the potential loss of principal. Real estate investments — including DSTs — carry additional risks including illiquidity, sponsor dependence, and tenant concentration. Charitable remainder trusts are irrevocable and have specific compliance requirements. Installment sales carry counterparty and interest-rate risk. Past performance is not indicative of future results.
Registered Investment Adviser. Investment advisory services are offered through Avidity Capital Inc., a Registered Investment Adviser located in Hanford, California. Registration does not imply a certain level of skill or training. Additional information is available at adviserinfo.sec.gov.
No Commissions. Avidity Capital Inc. does not accept commissions, referral fees, or revenue-sharing arrangements from real estate sponsors, DST issuers, qualified intermediaries, or any third party in connection with strategies discussed on this page. Clients are billed a flat advisory fee for services provided.
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